Ben Bernanke, chairman of the Federal Reserve, offered some succour to his predecessor, Alan Greenspan, as the former chairman fights to defend his legacy from claims he inflated the housing market bubble that has popped disastrously in the US.
In testimony before Congress yesterday, Mr Bernanke backed his predecessor's argument that persistently low long-term interest rates contributed to the boom, and that those rates had proved remarkably difficult for the central bank to control.
Politicians on Capital Hill are among those most keenly searching for villains in the boom and bust of the US housing market. Hearings yesterday were meant to examine ways to limit a wave of repossessions that now seems inevitable after several years of irresponsible mortgage lending to low-income Americans. In television appearances to promote his memoir, The Age of Turbulence, Mr Greenspan has been accused of keeping interest rates too low for too long after the recession at the start of the decade.
But Mr Bernanke said: "I think there were other factors associated with housing price increases including very low long-term interest rates around the world, which were associated with big increases in house prices in other countries, not just the US." He said that when the Fed did begin to raise rates, those long-term rates failed to respond as much as they had expected.
Mr Bernanke's testimony came two days after the Fed shaved a half-percentage point off interest rates in a bid to prevent the housing market slide and a crisis in the credit markets from spilling over into the rest of the economy. He promised to take further action if necessary, but also put inflation concerns firmly back on the agenda, reflecting how future rate cuts are not yet a shoo-in.
Between two and three million Americans may be at risk of losing their homes as low introductory interest mortgage rates expire over the next 18 months. Whereas many had been assured they could refinance before the higher rate kicks in, the collapse in the market for mortgage-backed assets means such loans are now much harder to come by.
The Bush administration yesterday signalled a U-turn on whether the government-sponsored mortgage companies Freddie Mac and Fannie Mae should be allowed to buy a wider range of mortgages. Hank Paulson, Treasury secretary, told the House financial services committee a relaxation of the rules would help, but he tied any changes to reform of how Fannie and Freddie operate.